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the extent of damages not in excess of the amount paid for
medical care described in section 213(d)(1)(A) and (B)
attributable to emotional distress. See sec. 104(a) (flush
language).
When damages are received pursuant to a settlement
agreement, the nature of the claim that was the actual basis for
settlement, and not the validity of the claim, controls whether
such amount is excludable under section 104(a)(2). United States
v. Burke, supra at 237; see also Bagley v. Commissioner, 105 T.C.
396, 406 (1995) (“[T]he critical question is, in lieu of what was
the settlement amount paid?”), affd. 121 F.3d 393 (8th Cir.
1997). The determination of the nature of the claim is a factual
inquiry and is generally made by reference to the settlement
agreement. Robinson v. Commissioner, 102 T.C. 116, 126 (1994),
affd. in part and revd. in part on another issue 70 F.3d 34 (5th
Cir. 1995). An express allocation in the settlement agreement of
a portion of the proceeds to tort or tortlike claims is generally
binding for tax purposes if the agreement was entered into by the
parties in an adversarial relationship at arm’s length and in
good faith. Bagley v. Commissioner, supra at 406; Robinson v.
Commissioner, supra at 126-127. If the settlement agreement
lacks express language stating what the settlement amount was
paid to settle, we look to the intent of the payor, based on all
the facts and circumstances of the case, including the complaint
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